Sagging Swiss fintech fortunes in need of a facelift

Can Switzerland’s fintech sector make hay after coronavirus flattened last year’s crop?

Evaluating the health of an entire industry is always a ticklish business – some companies will always fare better than others at any given time. But taken as a whole, it appears that Swiss fintech has experienced a year of “stagnation”.

“The continuous growth and increasing maturity of the Swiss fintech sector observed in earlier years came to a halt in 2020,” says the annual industry study by the Lucerne University of Applied Sciences and Arts.

The number of new fintech start-ups increased by just 23, bringing the total to 405. That’s the lowest growth since 2015.

And it looks like these firms are experiencing a two-speed growth trajectory. A few fast-track companies are pulling away from the pack, leaving the majority trailing in their wake. The number of firms capitalised with more than CHF10 million rose at the same pace as those with no more than CHF500,000 to play with.

The median company capitalisation decreased from CHF2.1 million in 2019 to CHF1.4 million last year, while the number of jobs in the sector remained at the same level. An increasing proportion of these jobs (now 37%) are located outside of Switzerland.

And this comes on top of reduced venture capital funding, that I reported on earlier. According to data from CB Insights, Switzerland somehow missed the boat here. VC funding for fintech start-ups declined slightly last year globally, but Europe saw a noticeable uptick.

To some extent, Covid-19 seems to have played a spoiling hand. Just over half of Swiss fintechs sell their product purely to established financial players such as banks (B2B model). Only 5% go straight to the consumer, with the remainder having a bet both ways. B2B companies say they rely on face-to-face meetings and cannot operate as well digitally – at least when it comes to introducing and explaining their product to potential new customers.

An executive at a Swiss fintech accelerator told me this week (on background, hence no name) that the “sense of purpose has increased but the pace of doing business has slowed.” What he means is that start-ups have suffered from a lack of human contact – even if they sell a digital product.

Government bail-outs of struggling businesses during the pandemic also appears to have reduced business for crowd-lending platforms. But it’s not all grim news. There is genuine optimism across the industry that Covid-19 also helped further expose shortcomings in the traditional financial infrastructure that can be fixed by nimble digital-savvy start-ups.

Last year the Swiss blockchain industry forecast disaster in the face of coronavirus. It seems this doomsday scenario never materialised.  

A report from start-up incubator CV VC, Strategy& and Inacta found the number of blockchain companies rose from 919 in mid-2020 to 960 by the end of February this year. The number of employees has also increased in the same period, from 4,780 to 5,184. Not all blockchain players offer financial services, but a fair proportion do.

On the funding side, many blockchain companies had the distinct advantage of holding part of their treasury in cryptocurrencies. Given the huge rise in the price of bitcoin last year, this helped boost the combined valuation of the top 50 blockchain firms from $37.5 billion midway through 2020 to a whopping $254.9 billion now. This is, of course, a double-edged sword. The price of bitcoin has been known to plummet as fast as it rises in a very short space of time.

Getting back to those VC funding figures I mentioned earlier, around half of the CHF220 million issued last year was absorbed by a handful of digital assets players.

Report author Ralf Kubli is optimistic. “Switzerland boasts one of the world’s most advanced blockchain legislations and has thus created a strong and solid foundation for the future prosperity of Crypto Valley. In addition, the Corona pandemic has forced digitisation to accelerate, which has greatly benefited blockchain technology,” he says.